COMMENT: Tesco | Queen’s Speech

MARTIN FLANAGAN

IF THERE is a bona fide turnaround programme at Tesco, it is taking the scenic route.

Phil Clarke, group chief executive, has unveiled the worst quarterly drop in underlying sales – 3.8 per cent – since he took over in early 2011. He is therefore far from the new man at the helm any more, and City unease is palpable and growing.

It was the third consecutive same-floorspace sales fall at Britain’s biggest supermarket group, and Clarke made no bones about the fact that revenue pressures are set to continue for some quarters yet.

Tesco’s plight is that it is like a householder needing to install a new roof to replace a badly leaky one, but unfortunately having to do the job amid rain and high winds.

The latest disappointing sales continue the established theme of the company being squeezed between high-stepping ritzy rivals Waitrose and Marks & Spencer from above, and successful price-cutting parvenus Lidl and Aldi from below.

And, on the macro level, although the economic recovery is taking hold, consumers do not yet have the feelgood factor in their pockets and are shopping around for value.

With Morrisons and Asda setting the pace on price promotions to keep pace with the discounters, Tesco has to respond in kind, and that in turn is depressing its profit margins.

In fact, margin in the supermarket sector almost has a quaint ring to it now as players pull out all the stops on price to draw footfall and sales instead.

Whither now for Clarke’s turnaround?

There looks scant option but to plough on with Tesco’s major UK store refurbishment programme, and take the accompanying disruption to sales on the chin.

Meanwhile, Clarke will hope that the cycle gradually turns away from tough conditions in some of the group’s overseas markets.

And he will take some solace from the solid performance at the retailer’s internet business and its UK convenience stores, Tesco Express and Tesco Metro.

Being charitable, maybe the group is at its nadir presently, hit by changing market dynamics and company-specific own goals (such as the disastrous and discontinued foray into America under Clarke’s predecessor, Sir Terry Leahy).

But you wonder whether, even when the group eventually completes its multi-billion pound revamp, the optimum outcome will be stabilisation or low-digit growth in a food retailing industry that is being transmogrified.

By contrast, with each passing quarter, a return to Tesco’s palmy days between the mid–1990s and the 2008-9 recession looks a case of chasing rainbows in the aisles.

Going Dutch on pensions has risks

Business has largely welcomed the aims outlined in the Queen’s Speech to boost choice and flexibility in the pensions market by the introduction of Dutch-style collective defined contribution (CDC) schemes.

But the initial consensus seems to be that, in practice, CDCs will mainly only be an option for major companies as they need a steady stream of new members to make the pooling of risk fair between generations.

Equally, pooling pension schemes in mega funds to give more certainty over the eventual size of pension payouts ramps up the risk levels and it is vital that business gets more clarity about the accompanying governance structure.